We saw earlier the super cycle of commodities. Another pocket that has become very expensive but which the markets like is FMCG. Could those kinds of stocks be under threat because of inflation? There has been a veiled profit warning from the top boss of Nestle India. As far as tea, coffee, milk prices go, would it have a rub-off effect on them?
Yes, definitely it does have an effect on margins because the raw material cost goes up and that goes for a lot of industries — be it auto, FMCG, anything agri based. Crude is a very very big input for the Indian economy as a whole which we import. And the price of the crude starts affecting margins which start getting compressed. We are already hearing managements talk about it and that will reflect in numbers. So that brings us back to the debate — whether inflation is transitionary or structural. If it is transitionary, the market will forget about it and think that okay the margin is compressed for a quarter or two and move on; but if it is structural, they will have to rework the excel sheets and margins will have to be compressed and that would affect some of the stocks where the PEs are very high, because these are the names which may not justify and little bit of compression that may happen out there.
There was a great deal of volatility in metal stocks on Tuesday. I can speak out of my personal experience that volatility typically means that buyers and sellers are not able to arrive at a price and so something is going to change?
Well it need not to be a trend changer, it could also be a bit of a correction because when I look at global commodity charts,I think that when you violate a 10 year-12 year downtrend, then a lot more can happen. The dream run that we had in metals with the stocks going one way up, happens rarely in metals. The metal stocks tend to be very volatile and that is why most fund managers have great difficulty in having overweight metal positions.
I personally do not think that it is a turnaround in the trend because when I go back and look at decadal trends. I realise a very big move has happened. If it corrects 10-15%, it is fine. I look at the CRP index. As long as it is above 200, things are okay and metals can correct and move up again. Commodities can correct and have a move up but volatility is very much in nature of this asset and you will not see such volatility in an IT stock or a FMCG stock.
That is why the kind of people or crowd metal stocks attract is very different. These are people who are very fast and who can change their position, change buy and sell very fast. Most people prefer structural stories and that is why people are very hesitant to be overweight on metals.
Metal was into a multi-year bear market. It has come out now and it is a bull market now. Will the same theory apply to real estate, telecom and even media?
Post 2008, the real estate sector has been in a fall. It has been a decadal consolidation. The consolidation has been going on for 10-12 years and it is definitely pushing to the upper end of the bracket. Now when we look at the construct of the index based on the weightages, we realise that DLF actually pushes a lot of weight. However, if this is converted into an equal weight index where one can take away the weightages given because of market cap, one realises that it is not so bad because there are lot of real estate stocks which are at lifetime highs.
As a sector,the NSE real estate index has been in a massive consolidation, but if you look at the components, 80% are doing very well. It is just the weightage of one or two stocks which is pushing the index down. So, what may look like an illusionary underperformer, may not be doing so bad . One can go out and see that many stocks are pushing to lifetime highs. So there is a lot happening in real estate stocks which has not been covered or reflected in the index. It is the same case with telecom. It is again a play of weightages and one or two stocks change the whole flavour of that.
So, these are decadal underperformers which are doing a very big catch up and I personally think that there is a lot of juice still left in them. The true test of these sectors will come the day the market corrects. When there is euphoria, people want to buy anything and everything but when markets correct which we are experiencing right now, you will realise that if the sectors fall less and they are first to rise, that is a typical characteristic of change in trend, of change of leadership. So corrections also are great times to do research because stocks that fall less in falling markets are leaders of the next bull market and we are seeing that.
The next bull market can be pretty far away but the seeds of that or the research for that is actually done in consolidation. So in consolidations, we look for those sectors and stocks that fall less when markets fall and rise more when markets go up and I think that should be the mantra or that should be the strategy for the next few months.
